09/06/2022
Thinking is Tough
How many decisions would you guess that you make in a given day? Take a second mentally walk through your day & hazard a guess. Most people would think & land somewhere around 100, which is way off-try 35000.
Thats right you make 35,000 decisions per day.
Canonical models of decision making deal with two types of decisions-certain (i.e. known set of alternatives with given outcomes) & uncertain (just the opposite). In theory , decisions made under conditions of certainty involve ranking the known alternatives and choosing the most preferred option, simple enough. Uncertain decisions operate from a similar theory, with the only kink being that subjective probabilities are assigned to the different outcome likelihoods. Thus decision makers weigh the desirability of a given option by the chance that it will or wonāt occur
These are nice ideas and make some sense until you consider the sheer volume of decisions we make each day. When you consider that you make 12775000 decisions each year, Thinking that each determination is made by weighing its probabilistic utility starts to strain credulity. Making that many decisions sounds exhausting, and indeed research supports that it is. This leads to disproportionately stick with the familiar.
In their āStratus Quo Bias in Decision Making paper',Samuelson and Zechhauser found that classical models of decision- making vastly under predict the degree to which we stick with
what we are already doing. When considering decisions as diverse as voting, making business decision, choosing health insurance and managing retirement accounts, the two researches found that we overwhelmingly default to the status of quo.
How does all this come together when investing.
Hereās a story we picked up from āThe Psychology of Moneyā written by Morgan Housel.
āA genius is the man who can do the average thing, when everyone else around him is losing his mindā -NAPOLEON.
Ronal James Read was an American philanthropist, investor, janitor and a gas station attendant.
For those who knew him there wasnāt worth much mentioning his life was as low key as they come. He lived an extremely frugal life. He fixed cars & swept floors. Read passed away at age 92 in 2014. 2.8Mn Americans passed away that year & less than 4000 people had a net Wirth of $8Mn, Read was one of them. Those who knew Read were baffled. Read saved what little he could and invested in blue chip stocks, then he waited for decades as tiny savings compounded into $8 million.
Markets will continue to present us with opportunity to buy wonderful businessās several times, it is the nature of the market that prices go up & down every day. Ultimately if we want to replicate what Ronald achieved, is we buy great businessās and stick with them, by nature we like to associate with managers who demonstrate this quality.
Disclaimer : We are registered Distributors of Financial Products. Past performance is not a necessary guide to future performance.
